You save up that baby emergency fund in order to insure yourself against the risk of life's little emergencies that have a way of popping up at the least opportune time. If you don't save up that money as an insurance policy, you can be assured that your plan to get out of debt will be set back many times over by many little “emergencies”.

If you have an emergency fund saved, no new debt is created, and you just take the time to re-stock that emergency fund in case of further expenses.

Today we will look at Baby Step 2, paying off all debt using the debt snowball.

Pay Off Your Debt Using The Debt Snowball

Now that you’ve got your $1000 emergency fund saved, it's time to get intense about paying off all your debt. Dave Ramsey likes to call this getting “gazelle intense”, in reference to the bursts of speed and intensity a gazelle will use in order to get away from a cheetah (or in our case, debt).

For many people this step is the longest in your 7 baby steps.

If you’ve built up a lot of debt over the years in the form of student loans, auto loans, credit card debt and other things, it probably took you a long time to get so far in the hole, and it will take quite a while to dig your way back out. But you CAN get back out!

If you're not so far in the hole, getting out of debt can happen a lot quicker, and you can get on to the next steps of building up a larger emergency fund, paying off your home early, building wealth and giving more.

If you've gotten this far and you haven't done a budget yet, now would be the time to get started.

Figure out where you are in regards to your income, expenses and your debt obligations. Do a zero based budget and make sure that every dollar is accounted for – because every extra dollar is now going to be going to debt reduction.

Once you’ve got all of your income, expenses and debt listed, follow these steps to get rid of your non-mortgage debt. (Mortgage debt is paid off separately in another baby step, so exclude it for now)

The Debt Snowball

Here is a rundown of the debt snowball plan.

Put all your debts in order from the smallest balance to the largest balance.

After you have paid for food, clothing, transportation and a roof over your head (the necessities), pay the minimum paymentson all of your debts.

Put any extra money left over towards paying off the smallest debt first.

Pay off your smallest debt, and then “snowball” the money you were paying on that debt over to the next largest debt.

Continue paying off the next largest debt, and when that one is complete, roll it all over to the next largest debt until you are completed.

That's not too hard, right? Just pay off your debts from smallest to largest until they are all paid off!

While a credit score isn't the be-all and end-all of your financial snapshot, it can still be rather helpful as you keep tabs on your overall financial situation.

While it might cost you money to access a more “official” credit score, there are plenty of ways that you can get a general idea of how you are doing when you use some of the free resources available for credit scores.

Free Credit Scores

There are ways to get free credit scores, including having a loan rejected. However, if you don't want to apply for credit just to see where you stand in terms of your credit, there are sites where you can see your free credit score.

Credit Karma: TransUnion score, as well as your VantageScore and even your insurance score.

Turbo from Intuit: Transunion score is supplied by Turbo, as well as a variety of helpful financial information about you and tips for your situation.

eCredable: You won't get a consumer credit score like you're used to, but you will get an idea of where you might stand with the help of the credit rating simulator.

It's important to note that these free credit scores aren't “official.” It's not what lenders see when they pull your credit. And they aren't scores that you would get if you paid for your score at myFICO.com. However, these free scores can give you a good idea of whether or not you are making progress with your finances.

Track Your Financial Progress

For the most part, free resources are best used to keep tabs on your general situation. You can use these resources to see whether or not you have good credit in general, as well as see where you could improve. Additionally, if you notice a sudden drop in your score on one of these sites, it could be an indication that there is something very wrong with your credit (including identity theft). Monitoring your situation can alert you to possible problems that you might need to address quickly.

If you think that the issue might be identity theft, you should check your credit report as soon as possible. If you haven't checked in the last 12 months, you should log on to annualcreditreport.com to get a report from each of the three major bureaus for free. Even if you aren't eligible for a free report right now, it is still worth it to pay to access your report if you think that your identity might be at risk.

Keep an eye on your situation, and you can watch it improve. Many of these sites offer insights into where you stand in comparison to others, as well as providing tips for improving your credit situation. If you are looking to take control of your financial situation, these free resources can actually be quite helpful. Get an idea of where your finances are going, and you'll be in a better position to improve your situation.

Do you know of any other free resources to keep tabs on your credit? Tell us in the comments.

For my first real post on this personal finance blog I thought it would be appropriate to talk about one of the people who have influenced my financial life the most, Dave Ramsey.

For those of you who don't know, Dave Ramsey is a personal finance guru who has a daily radio and TV show, in addition to personal finance seminar called Financial Peace University.

Dave Ramsey is extremely popular, and most of his radio and TV shows focus on helping people who have gotten themselves deep into debt, and need help in finding a way out. One of the biggest ways they end up getting out of debt is by following his 7 Baby Steps plan.

Dave Ramsey’s 7 Baby Steps

Step 1 – $1,000 to start an Emergency Fund: The first step asks you to save up a bit of “just in case” money – in other words – some money for just in case the unexpected happens. What kind of unexpected things? Things like flat tires, doctor bills, and a furnace going out in the dead of winter will be covered by this small emergency fund.

Step 2 – Pay off all debt using the Debt Snowball: List your debts from smallest to largest. Pay the minimums on all of the debts. With money left over after you pay the minimums, you pay extra on your smallest debt – until it is paid off completely. Once you pay off the smallest debt, you then start paying on the next smallest debt.

Step 5 –College funding for children: Save up some money for your kids education. I don't think you should pay for all of it, but some is good.

Step 6 – Pay off home early: Make some extra mortgage payments to pay down the principal and own your house faster!

Step 7 – Build wealth and give! (Invest in mutual funds and real estate): Continue building wealth through mutual funds and real estate, and more importantly give til you can't give no more!

When you write it down it seems like it would be so simple to get out of debt and start building wealth, but Ramsey is the first to tell you that it takes a lot of hard work and “gazelle intensity” in order to find your way out of the depths of debt.

I know personally that his plan can work as my wife and I have used it to get out of debt. Is it a perfect plan for absolutely every situation? Maybe not. But it does work for a majority of those who try it and stick to it.

Over the coming days and weeks I'm going to do a series of posts talking about Dave Ramsey's 7 Baby Steps, one by one. I hope that in talking about it I can give some hope to some of you out there who are looking for a way out.

What do you think of the 7 baby steps? Have you used the plan? Would you recommend it to others? Tell me what you think in the comments and welcome!

If you want to stay on top of your credit like I do, you have quite a few options that you can take advantage of in order to monitor your credit. With the passage of the Fair Credit Reporting Act legislation the federal government gave consumers the ability to pull their credit reports from each of the three agencies, TransUnion, Equifax and Experian, once a year. AnnualCreditReport.com is the government site where you can go to get your 3 free credit reports each year. I like to stagger them every 3 months or so, to get the most impact froom checking my reports throughout the year.

While you can get your credit report for free through the government site, if you want to find your credit score you'll have to pay an extra fee when pulling your credit report. But nowadays there are also a handful of sites out there that are offering your credit score for free , in exchange for using their sites – usually which offers deals on credit, loans and other financial products.

Credit Sesame is one of those sites, and they're offering you a free credit score – with no obligations, credit cards or other strings. Today I thought I'd do a quick look at the site.

Free Experian Credit Score At Credit Sesame

Credit Sesame has gotten quite a bit of buzz in the blogosphere recently. Why? Because they offer a free Experian credit score, without having to enter a credit card like some sites require.

I just signed up for Credit Sesame a couple of weeks ago after reading about the service on Twitter. I had just learned about Credit Karma and how you could get a free TransUnion credit score from them, and someone told me that the same thing was possible with Credit Sesame. So I decided to give it a go.

The Sign-up Process

Getting going with Credit Sesame was actually easier than I thought it would be. Basically they'll ask you for some basic personal info, a home address and then ask whether you are a homeowner or if you rent. Then in the next step it will ask for your social security number so it can pull your Experian credit file. If you're not sure about giving that info out, you may not want to proceed. The site is secure, however, and I'm ok with doing that. Once you enter your social, it will ask you to verify some information credit file information so that it knows you are who you say you are.

Getting Your Credit Score

After you signup you'll be taken to your Credit Sesame overview page where it takes a look at your current situation. Right there on the homepage under the “My Finances” heading, they'll show you your free credit score from Experian. What you're seeing is Experian's “National Equivalency Score”. Please note that each of the agencies has their own score, and this is different from your FICO score, which should be similar- but is different.

My score came up as a 789, which is comparable to the 780 that I got with Credit Karma/TransUnion. Not too shabby! How could I do better? Maybe actually use some of the credit that I have? (Do you see the “0% credit usage” in the graphic above?)

Finding Better Loan Options

For those who signed up as homeowners at the beginning of the process, Credit Sesame will also give you some further data including an estimated home value via eppraisal.com, a goals section where they show you how you can improve, and if you have outstanding loans, they'll give you some examples of how you can improve your current situation. They'll only show you loan options that you're likely to qualify for after running your credit profile and score, so there won't be a whole lot of bait and switch with rates and fees. What you see should be essentially what you get.

Their home loan technology is now actually integrated with Mint.com as that website's “home loan finder”, so you know it will be easy to use and effective – like mint.com

When I ran Credit Sesame against my situation they were able to offer me a few options our our only current debt – our home mortgage. They found us several lower rates on mortgages, but the closing costs associated with the deals made them somewhat a non-starter since by the time we would have them paid back through lower payments, we'll probably already be thinking about moving again. But for most people who are planning on staying put for a while, you'll probably be able to find some decent deals.

What's To Like About Credit Sesame

Credit Sesame has a lot of good stuff going for it. Here are a few things I like about the service.

It's a free service – and a free credit score! What's not to like about getting a free credit score without having to provide a credit card number? You might even find a better deal on a home or other loan.

Regularly updated credit scores: Your credit score is updated every month, so you can stay on top of your credit for drastic score swings -to tip you off that there might be a problem. Use it as part of a home-grown ID theft plan!

Save on home loans and other credit: Credit Sesame will show you if your current loan is a good deal, and if they can find a better deal they'll give you all the details up front about closing costs, break even time for refinancing, total savings and more.

Conclusion

Signing up for Credit Sesame was easy, painless and only took a minute. What it offers is well worth it. They give you your Experian credit score for free, when normally you'd have to pay to see it, or sign up for a free trial offer of some sort. They also give you some good options when it comes to refinancing your home mortgage if you have one, giving you the chance to save a ton of money on your mortgage.

Credit Sesame is now becoming a part of my homegrown credit monitoring plan where I'll be using it in conjunction with Credit Karma, AnnualCreditReport.com and Quizzle. All of these services will give you a free credit report or free credit score. You don't have to pay a ton to stay on top of your credit, just use the freely available services like Credit Sesame to keep tabs!

Credit Sesame is free to use and there is no obligation to continue using it if you don't want to, so you've really got nothing to lose. Head on over today, sign up and see where your credit score is!

Unfortunately, there is some confusion over what is likely to affect your credit score. A recent survey from TransUnion indicates that there are some major points of confusion for many consumers when it comes to their credit score.

Are You Confused About What Affects Your Credit Score?

The TransUnion survey identified some common points of confusion for many consumers and strives to clarify some of the confusion. Here are some of the main misconceptions that consumers have when it comes to credit scoring:

Cell Phone and Rent Payments Affect Your Credit Score: According to the survey, 45 percent of respondents thought that rent directly affected their credit scores. At the same time, 47 percent thought that cell phone payments directly affect scores.

The reality is that, while some credit bureaus and even FICO are toying with the idea of including some non-traditional information in their models, right now credit scores aren't directly affected by these payments. If you miss payments, your account can be turned over to collections, and that will drag your score down, but right now positive payments aren't often reported and used to figure your credit score.

Income Matters for your Credit Score: It would be nice to think that, as your income improves, so does your credit score. In fact, 48 percent of respondents to the TransUnion survey assumed that a pay raise would help credit scores.

However, this isn't the case. Your income is not considered a factor in determining your credit score. How much debt you carry relative to your available credit matters, but your income isn't a factor. You're better off making sure that you pay on time and keep your debt low — no matter how much you make — than hoping that a pay increase will save your credit score.

Credit Inquiries and Your Credit Score: Many consumers are also confused about how credit inquiries affect their scores. About 40 percent don't understand the connection, and some believe that checking their own scores will cause a problem.

If you apply for credit, your score could be impacted. However, if you check your own credit score, nothing will change about your score. There is confusion about other inquiries as well, though. Sometimes telecom companies and others look at your score, and they way the look might have different impacts. It's best to ask before you agree to an inquiry.

In the end, understanding how your credit score is figured can be a big help to you as you plan ahead. Before making a major purchase that requires a loan, such as a home, you need to make sure that you have good credit. Staying on top of the situation can benefit you later.

Building good credit is a years-long process, while destroying credit only takes a few bad decisions. With this in mind, it’s important for new credit users to avoid the many mistakes which lead to bad credit scores. Too often it seems inexperienced credit cardholders underestimate the ease through which bad credit can be acquired.

For these folks – the young ones especially – we thought it necessary to highlight the five best ways to avoid a bad credit score:

Maintain A Healthy Debt-To-Income Ratio

Credit score criteria includes something called the debt-to-income ratio. Basically it’s all your monthly debt payments added up and compared to your gross monthly income. If the former makes up more than 25% of the latter, then credit scores are sure to plummet.

Monitor your finances monthly to always know your debt-to-income ratio. That way you won’t let yourself accidentally fall into a ratio which looks unfavorable to creditors and lenders.

Adhere To Due Dates

Okay, we’ll start off by sharing a dirty little secret: one or two credit card payments paid a day or two late typically won’t result in a bad mark appearing on your credit report. But don’t risk it.

Companies that don’t immediately report your late payments to credit monitoring agencies can still do so at anytime, so never, ever neglect the due dates, even if your credit card company has been lenient in the past. Though somewhat hard to incur, one late payment mark on your credit report is enough to knock your score down several points.

Use Regularly, But Also Responsibly

This is probably the trickiest way to both build good credit and avoid destroying it at the same time. Creditors don’t want someone who hoards lines of credit and never uses them as much as they don’t want someone who maxes out their cards and never pays. They want customers who actively use their services responsibly. This is why your score can drop when you don’t use the credit you have. Online credit repair services typically tweet valuable tips and tricks for maintaining and managing responsible credit. Give them a look for some ideas on how to keep a good balance between credit use and paying off debt.

Appreciate The Interest Rate

The annual percentage rate of credit cards is often and unfortunately one of the last things new cardholders consider before accepting an offer for a card.

New credit card users are unlikely to see interest rates below 15% and are probably looking at something closer to 20%. So just think about that. If you spend $1500 with credit and take a year paying it off at $137/month, by the end of the year you’ll have paid around $145 in interest if your APR is 17%. That may not seem like much, but considering the average credit card debt in America is around $16,000 for a one-card household, it’s easy to see how credit card companies make their money and how credit card users can find themselves with a less than impressive credit score.

Increase Your Monthly Payment

The minimum payment imposed by credit card companies is designed to have you paying off your debt for as long as possible. The longer such a situation is allowed to continue the more likely it is you’ll continue to rack up debt without paying it off at the appropriate rate for a responsible debt-to-income ratio. The best way to combat this is to always opt for more than the minimum monthly payment. You’ll beat the interest rate and pay off the debt faster, which both contribute to keeping your credit score strong.

The unfortunate nature of new credit card use is that inexperience with money and spending breeds bad financial decision making. This is turn leads to bad credit, which initiates a vicious cycle of struggle which is difficult to get out of. Avoid it altogether by making sure you do what’s necessary to always maintain a good credit score.

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